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An economy with no government is described by the following: • Marginal propensity to consumer = 0.8 • Marginal propensity to import = 0.2 • Autonomous expenditure = 500 • Potential GDP = 1500 1. The aggregate expenditure function is thus AE = 500 0.6 Y. 2. The multiplier is 1

An economy with no government is described by the following: • Marginal propensity to consumer = 0.8 • Marginal propensity to import = 0.2 • Autonomous expenditure = 500 • Potential GDP = 1500 1. The aggregate expenditure function is thus AE = 500 0.6 Y. 2. The multiplier is 1

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
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I could use some help finding the government's budget balance. Questions 4-7.

An economy with no government is described by the following: • Marginal propensity to consumer = 0.8 Marginal propensity to import = 0.2 Autonomous expenditure = 500 • Potential GDP = 1500 1. The aggregate expenditure function is thus AE = 500 0.6 Y. 2. The multiplier is 1 3. Equilibrium GDP is Y = 1250 4. The output gap is -250 5. There is a recessionary + output gap. Suppose now a government is established: Tax rate = 12.5% • Government expenditure = 100 1. The new aggregate expenditure function is AE = 100 .125 Y 2. The new multiplier is 8 3. The new equilibrium GDP is Y = 114.29 4. The new output gap is 1385.71 5. The government's budget balance function is BB = 6. The government's budget balance at the equilibrium is which is a 7. The structural budget balance is SBB = which is a 8. What level of government spending would close the output gap? 9. As a result, the government's new (structural) budget balance is 10. If the government does not want to increase expenditure to close the output gap, an alternative option would be to decrease + taxes
Transcribed Image Text:An economy with no government is described by the following: • Marginal propensity to consumer = 0.8 Marginal propensity to import = 0.2 Autonomous expenditure = 500 • Potential GDP = 1500 1. The aggregate expenditure function is thus AE = 500 0.6 Y. 2. The multiplier is 1 3. Equilibrium GDP is Y = 1250 4. The output gap is -250 5. There is a recessionary + output gap. Suppose now a government is established: Tax rate = 12.5% • Government expenditure = 100 1. The new aggregate expenditure function is AE = 100 .125 Y 2. The new multiplier is 8 3. The new equilibrium GDP is Y = 114.29 4. The new output gap is 1385.71 5. The government's budget balance function is BB = 6. The government's budget balance at the equilibrium is which is a 7. The structural budget balance is SBB = which is a 8. What level of government spending would close the output gap? 9. As a result, the government's new (structural) budget balance is 10. If the government does not want to increase expenditure to close the output gap, an alternative option would be to decrease + taxes
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